Satia Industries Limited (539201) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Satia Industries Limited Q2 FY '24 and H1 FY '24 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Runjhun Jain. Thank you, and over to you.

Thank you, Yousef. Good afternoon, everyone. On behalf of Satia Industries Limited, I welcome all of you to the company's Q2 FY '24 earnings conference call. I'm Runjhun Jain from EY IR practice, and we manage Investor Relations for the company. We hope you would have got the chance to review the results which are available on exchanges and on company's website. To discuss the company's performance in the quarter gone by, we have with us Mr. R. K. Bhandari, Joint Managing Director; and Mr. Rachit Nagpal, Chief Financial Officer of the company. Before we proceed with the call, a disclaimer, please do note that anything said on this call during the interaction and/or in our collaterals, which reflects the outlook towards the future or which should be taken as a certain forward-looking statement, must be viewed in conjunction with the risk the company faces and may not be updated from time to time. More details can be found on the company's website, that is, www.satiagroup.com. Should you have any queries or need any further information at the end of this call, you can reach out to us on the e-mail address as mentioned in the company's collection. With that, I would now like to hand over the call to Mr. Rachit Nagpal. Thank you, and over to you, sir.

Thank you, and a warm good afternoon to you all. Ladies and gentlemen, we extend a warm welcome to our Q2 and H1 Financial Year '24 Conference Call. Let's begin with an overview of recent industry developments. The previous quarter presented formidable challenges for the sector with paper prices witnessing a notable decline and source of raw material, especially wood chips surged. This stark contrast in pricing dynamics had a significant impact on almost all industry players, including ourselves. Consequently, our revenues saw a year-on-year decrease of 19%, amounting to INR 3,734 million. However, when we were on a half yearly basis, our production, sale realization, and revenue remained stable. Despite a scheduled renovation shutdown on 2 of our paper machines, our production volume was slightly more than that of H1 financial year '23. We anticipate a volume upswing in the second half of FY '24, and we remain confident in our ability to achieve our projected guidance of 5% to 7% volume growth for financial year '24 compared to financial year '23. Despite facing the challenge of dumping of cheap imports with most major consumers for their requirement till December 2023 and lack of a strong sale in the market due to festive season, we at Satia Industries are well positioned to navigate these challenges. Thanks to our strong relationship with state text-book boards, and we have got good orders which are under execution in the current quarter. Our H1 FY '24 EBITDA margin grew to 27.6% against 18.7% in H1 financial year '23. And prior to that, an impressive INR 1,321 million against INR 811 million in H1 '23, reflecting a substantial 53% year-on-year growth. Regarding our ongoing CapEx initiative, we have successfully completed the initial phase of the wood pulping CapEx, which entails the installation of DDS in 4 wood pulping digesters to reduce steam consumption and enhance wood pulping capacity. Both these objectives have been achieved. Looking ahead to financial year '25, we have planned 2 major CapEx initiatives, which include the upgradation and modernization of PM3 to enhance its production capacity and optimize energy consumption and a new soda recovery boiler. We anticipate that these steps will further bolster our economies of scale, ultimately leading to improved profitability. Thanks to our strong cash generation capabilities, we have continued to reduce our long-term debt. In addition to regular debt repayment, we proactively prepaid INR 284 million during quarter 2 financial year '24 and INR 626 million in H1 financial year '24. We appreciate your participation in today's call, and a standard season's greetings in advance. We will now proceed to the question-and-answer session. Thank you.

[Operator Instructions] First question is from the line of Aman from Aman Investments.

Sir, first of all, I didn't hear the slide, but if you can just give me the order book which we are saying for the current quarter was because it was a little bit inaudible.

Order book is almost 35,000 tonnes with the textbooks because they are in the open market. Yes.

Perfect. Perfect. Sir, my question was from the past 2 years, you have done a substantial investment in our capacities. When this comes to a completion stage or commissioning, what kind of capacities are we looking at per day tonne or per annum? How are we looking to go upward?

In the future?

Yes, in the future, sir, when the planned core, everything is established. What type of capacities are we looking at in tonnage basis?

Last year, we did almost 210,000 tonnes, and we, as Rachit ji told, another 5% to 6%, we intend -- we may be increasing this year in the volume. And the management is looking to add minimum 100 tonnes per day additional capacity after...

So now -- okay, so is it good to assume that now 650 tonnes itself, so probably we'll be reaching 750 tonnes. And by when do we plan to reach that status? Is it -- any time limits?

If we look at the figure of 220 tonnes, if we achieve anywhere near this, this comes to almost 600 tonnes, which is our present finished paper capacity. So if we add another 100 tonnes, so we will be doing anywhere between 650 tonnes to 700 tonnes per day. So which could mean if we do 650 tonnes, so it should be almost 235,000 tonnes to 240,000 tonnes, which achieves the guidance we have been -- given earlier also. This will be after the financial year '25. Yes.

Okay. And sir, after commercialization of this CapEx, when do we see -- what will be the optimal CapEx capacity utilization, overall, within, 6 months or any short-term period?

Almost always has been in the range of 90% to 100% only.

Okay. So the additional capacity also will be in the same.

Yes.

Sir, also, how are we planning ourselves to supplement this additional capacity? How are we marketing ourselves? Or how are we placing ourselves better? If you can just -- and also, sir, your line is very unclear. If you can just speak little clearly or you can just check your signal, it will be much better, sir.

Yes. Actually, as we have been telling earlier -- now I am clear?

Yes, a little bit better, sir, a little better.

Yes. We had been telling earlier, now we have put our main focus, #1, on the photocopier paper, which we had been selling earlier, but the percentage was very low. But now a new target has been given to the marketing team. And they major first on photocopier, number one. And number two, we are adding some other high-end printing paper, which we have already introduced, and it has given successful trials. So that will be 100% wood-based paper. So we are looking to high-end quality paper segment in the coming time. So that will be totally different from our present product line. Yes.

Sir, on this matter, I have a follow-up question. Sir, you had mentioned that plans for you wanted to add high-end premium products, high-quality paper. So which products are we targeting, sir? Any particular segment in hygiene or any other products, absorbent paper or crafts paper? What type of new products are we targeting? And will -- yes, sir. Yes.

These are excess maplitho paper, which are used in at high-speed multicolor printing machines. And number two, as I mentioned earlier, photocopier paper. So these are the 2 premium products. And within that high-end printing paper, we are adding 2, 3 different products. So the product -- 2 products have already been launched. And we are looking to add 1 or 2 another products to that segment. Yes. But these will be all in the printing segment. Yes.

Okay. Sir, one more thing. What mix are we looking for going forward in near term for board and non-board sectors?

Our text-book board will remain in -- because our overall production will increase. So it will come down to almost 30%, 35%. And the open market will increase to almost 70% -- 65% to 70%. Yes.

Perfect. Perfect. So we'll -- is it right to estimate that it will be in the mix of 35-65?

Yes, it could be that.

Okay. And your guidance for the coming half yearly H2, EBITDA per tonne, because we have seen a little bit downside this time? And your guidance for H2 and all?

Yes. We explained earlier, even in the last call, that normal EBITDA in the paper industry with integrated units is anywhere between 20% to 25%, which is considered to be a good EBITDA margin. So first quarter was extraordinary as was the last quarter also because of the high prices. But since prices came down, so the EBITDA margin further reduced from almost 30% plus to 24% almost. So it will remain within this range only, 20% to 25%. And...

Sir, now, the prices have again -- yes, last one. I'm just joining the queue. Sir, now the prices have correct and just to follow. Now, the prices have corrected, and we are seeing an uptick on the prices. So going forward, are we confident on cementing on the quarter 1 performance going forward for our coming years to come, the cementing, like what we have done for Q1 and then growing on that space?

Yes. I can say that quarter 1 was -- we have to keep up our number one because we -- prices are definitely correcting, as you said. We have already started...

Sir, the line is now a little -- sir, sorry to interrupt, but line is unclear, if you can just adjust again.

Yes, yes. Prices, they have rightly corrected upward by 5% to 6%. But -- again, as I said earlier, we -- our guidance is EBITDA will remain within the range of 25% plus/minus, yes, for the year -- for the whole year. Yes.

Next question is from the line of Narendra from RoboCapital.

Most of my questions have been answered previously. So I just wanted to know what was the realization in Q2. And what was the change Y-o-Y and Q-o-Q, if you could throw some light?

No, we normally don't give specific numbers. But in the Q1, it was above INR 90,000. And in Q2, it was almost less than INR 75,000 a tonne. So the prices were down by almost 20%. Yes.

And you said you have seen an uptick of 5% to 7% in Q3, right?

Yes.

Okay. Got it. So is it sustaining at that level? Or do you see any further pressure or update coming -- going ahead?

After Diwali, and starting from December, prices may further go up because international pulp prices, they have seen upward trend in last 2, 3 months. So we hope that another 4%, 5% may increase. Yes.

Okay. Okay. Got it. And also, if I'm not wrong, we had a target of, say, INR 1,700 crores to INR 1,800 crores revenue in FY '24. So are we on track for that? Or is there any change?

Yes. We have already done almost, I think, INR 870 crores plus/minus. So -- and H2 should be better. So I think we'll remain within that range, yes, almost INR 1,700 crores to INR 1,800 crores.

Okay. And regarding your margins, you said 20%, 25% should be a sustainable range, right?

Yes, yes. Yes, that's true.

Next question is from the line of Ajay Kale from -- a retail Investor.

My question is already asked. I got my answers. You can go ahead with the others.

[Operator Instructions] We have our next follow-up question from the line of Mr. Aman from Aman Investments.

Sir, I just wanted to understand on the export side of our business, how are we seeing -- any guidance which you can give going forward in our revenue mix, what export will play a role because I think more of margin has been seen in Europe, U.S. segments and their consumption is also high? And also, we have a model where we can plug and play industrial customers' outsource business in India as well given our geographical and demographical advantages we have. Sir, any comments or any positive signs that you've seen? Or are we planning on those approaches?

Yes. Export prices as -- is the normal trend. They are almost always 5% to 8%, 10% lower than the indigenous market. So we have some liabilities also to export. So our exports, they will remain within the range of, I would say, 5% to 10% for the year.

Okay. Okay, sir. And sir, being a business cyclical in nature because we're majorly dependent upon paper and allied products. Sir, how are we trying to diversify or hedging these risks? Any...

Yes. We don't find the paper cyclical. We are -- as you have seen that our production has been increasing. In India, demand has been increasing. And as far as commodity is concerned, certain factors, they always command demand and the supply commands the prices. So that change in prices in abnormal times goes up and down. But, otherwise, more or less, if we look at the prices, they remain in the stable range.

Okay. Sir, and the issue which last year, we were facing of high inventory, and first quarter, people, industries destocked it in large quantity. Are we seeing those coming to an end? And also, sir, are we facing issues in unorganized sector because there is a -- whether there is a shift coming from being unorganized to organized in paper sector?

No, no, no. There is no such issue because the range we are in, so to enter that segment, it takes, number one, you need to go into a lot of formalities. And if you want to do some investment, it is a major capital investment and all permissions are very difficult to get an integrated pulp and paper. And to match the quality end of the -- and to match the costing of integrated units is quite difficult. So there is no challenge to the unit from any unorganized sector.

Okay. Sir, and a very hard fact to note that India is being largest demographical and geographical, 15 kg per capita. Do you envisage or do you [Foreign Language] whether this will go to 30 kg per capita by 2030 or some big visions you have? Or why are -- if such, why are you optimistic about? Just wanted to understand.

Yes. Because if we look at our domestic pulp -- paper and paper product market, we are just 4%, 5% of the world market while China with same population is almost 28% because of the high per kg per capita consumption. And that too because of the high literacy rate, and number two, high GDP rate. So both these things government is focusing. By their education policy, they are going to increase the literacy level, number one. And number two, GDP focus, you already know the government wants to be third largest economy in the world that, that target is there. So as far as India is concerned, I think another 10, 20 years, the market is going to grow at a good pace and future is bright for our paper industry.

Yes. In the last quarter, we have deduced some order of INR 350 crores from Government of Telangana. Sir, is it the new education policy which is playing out? Or is it a casual order on a need basis we usually get?

Yes. These are textbook orders, but the quantities have increased this year than over the last year because of the new education policy. Yes.

Okay. Okay. And sir, I just wanted to get your idea, is cutlery space going to derisking our business? Or it is a space which we are very much interested about independently planning the -- what you say, executing it in a fashion or an independent way. What is your view on this space, cutlery space, which we are having?

As far as cutlery is -- the market is not very, I would say ripe to accept pulp-molded products because of -- because government implementation of ban on single-use plastic is not that strict. So the prices, they are not very encouraging, number one. And technology to make the product is not very sound at the moment, which has caused some loss in the past also. So we are going very slow on that because of these 2 reasons.

Okay. Okay. Sir, and we were adding some measurements. Sir, these all CapEx, by when do you see it to be, any particular month or any particular time, like by March? Any guidance on completion of our CapEx being booked in the fixed asset account, any particular timeline?

New paper machine modification and recovery boiler, we'll be doing in financial year '25.

Okay. Okay. Because you're audible now, that's why.

Yes, all -- no, all orders have been placed, and execution machine shut for PM3 will be in financial '24, '25, which could be a shut of 2 to 3 months also. And recovery boiler is just a new boiler so that doesn't require any shut. Yes. It will be completed in financial year '25.

'25, great, sir. Sir, just wanted to understand your rationale with taking short-term debt and paying off long-term debt. Any particular objective which we are meeting?

Yes. We have already prepaid in H1 over INR 62 crores, as we mentioned in our previous call. So presently, our debt is just long term, debt is just INR 300 crores plus -- INR 305 crores only. And I think another 2 to 3 years, we can pay that debt any time. That is not a big issue.

Next question is from the line of Mr. Narendra from RoboCapital.

So the next question is just regarding your debt prepayment. So are we planning any further reduction of prepayments in the coming future?

Rachit ji, would you like to say anything?

Yes, yes. So, yes, as we might have told, we have already prepaid the debt of almost INR 62 crores as prepayment. Apart from that, we have done normal payment of INR 42 crores. So almost INR 105 crores debt has been repaid this year. And in the remaining 6 months, we have a normal repayment of INR 36 crores. So no such plans as of now, but it clearly depends on the cash flows. But as of now, no any such plans of prepayment.

Next question is from the line of Somnath Paul from Relay Investments.

I just wanted to understand, we have this state boards based orders, which -- or tenders which we received. So just sticking on the numbers for the price and the volumes which we got in January versus the one which we got latest, I think there is about 20% gap. So can you just throw some light on how this particular process works in the sense of the pricing one, and then, of course, on the payment? And are there some -- is this basically tender-based or there is -- what kind of competition do we faced? And what is the kind of pricing that you foresee given the fact that there will be curriculum change in the -- I mean, in the coming times? That is the first question. I'll follow up.

Yes. Textbook tenders, they are all done now on the GeM portal, Government of India GeM portal, so where whosoever meets the condition -- yes, yes, so whosoever meets the condition of that tender, because the conditions are set as per the quantity and the time period required -- the time period in which that quantity is required to be fulfilled. So like if you have 30,000 tonnes, and they want that in, let's say, 3 months, so you should have that kind of capacity to supply the paper. So there are certain conditions to that. So whosoever is able to fulfill those conditions, they can quote on the GeM portal. And after the bidding, they select, as you all must be knowing certain number of people for reverse auction, and then, the prices are finalized. So it comes from an open competition, open tender competition, number one. And prices, we normally quote looking into the future scenario. Everybody does like that. So if we expect the present prices are on the lower side, and prices are likely to go up by another, let's say, 5% to 10%, 15% in the coming season and looking to the time of execution of that order, if it is going to be executed in the lean period, we may quote less than the current price. If it is going to be executed in the high season, we may quote higher prices also. So that pricing, everybody quotes as per his own calculation, but everybody knows the industry well. So they come almost within a range. So -- and then quantities -- because quantities are big, no single mill within that time span of the text-book board maybe can supply that big quantity. So they normally distribute that tender in the range of 50% to the L1, original, 30% to the second, and 20% to the third lowest in the RA. So that is how that is done. So I hope that clears your question.

Yes. So what I understood -- so what I understand is that it's distributed between the industry. So do you generally see some kind of pressure in terms of pricing given the fact that industry -- the other players also try to compete? And how much of that -- because a lot of it will also depend on the pricing which we get, right? So that will definitely come into -- directly into the margins because our fixed costs will be covered by a certain cost and the remaining comes in the margin, so just trying to understand because we are, I think -- the publication business for the state boards is one of the major driver of the business. So just trying to see through that lens. So how do you see that going forward in the sense of the NCERT -- I mean, the curriculum getting changed for a lot of boards?

Yes. Actually, everybody has his own forte in the market. We have been doing this business -- textbook business for the last 25, 30 years, so we feel comfortable there. And maybe those players who are not doing government business, they do the same thing with the big publishers, like Navneet Publications, people book their quantity for another 3, 4, 5 months. So even international players, they book quantity of the indigenous players for 3, 4, 5 months. They make certain commitments on prices. So it is wherever you find depending upon the product line, depending upon your sources, your -- how much you can invest in the textbook boards, depends on everybody. And definitely, everybody would like to have a pure kind of business. So those who can supply on all-India basis, more than almost 20, 25 big mills, they are participating in different tenders and getting businesses on regular basis. We are not the single party. There are TNPLs, and the Seshasayees, and JK, Ballarpur. In cover paper, they are the only supplier to big suppliers, and Shreyans Industries, Trident, [indiscernible], KR Industries. So all these players, they are getting export board orders.

Yes. Sir, the reason I was trying to understand that I think the names which you mentioned are all big integrated mills and they have decent capacity as well as size. So, we don't foresee any kind of gaining share as such, right? So this will remain a space where everybody has their own market share. That is what I...

Yes, yes. Because we have a bigger capability to supply, so we normally, wherever we quote, we get a good-sized order, that's the only factor.

Sir, another question I wanted to ask is that your mill is based in Punjab, so which companies do you consider as your competitor may be in Punjab or otherwise of your size, capacity, and integrated plantation and mill? And alongside, I also wanted to understand what is the general spending for our distributors on marketing compared to the mills of our size. Is it more? Or is it mostly in line with what the other people give it to their distributors or partners?

Actually, all mills they sell paper to distributors on their own price. So normally distributors, they sell with their own calculation of the margin depending upon the urgency of the customer, number one. Then the payment terms of customer to customer. So that is their domain. So we do not give any fixed commission to any dealer. We fix our own price. And then dealers, they decide where it is -- where they can sell that product, number one. So as far as we are concerned, we have all the people there. We don't consider anybody as our competitor. We are working in our own domain. And we are trying to do our best, while other people, they are trying to do their own best. But the mill that is closest to our model is Kuantum, number one, and then Trident, then KR, and these are the 3, 4 people who are -- Shreyans Industries. So they are almost of similar nature as we are.

Okay. And I think, sir, the final question is that you mentioned about getting into photocopier and some other high-end products. So photocopier, if I'm not wrong, it's more of a commoditized business where as a common person, I mean, I don't find any of the user would distinguish between other than the credit terms, which normal shopkeeper would get. So I was just trying to -- try to get your understanding on the capital and the inventory cycle. Will it not get prolonged? Or do you have a balanced approach to this?

No, no, actually, photocopier has a consistent demand in the open market, that is number one. And it can give a consistent tonnage of almost minimum -- our target is to have minimum 15% to 20% in our total production segments, from 30,000 to 40,000 tonnes, and because price realization in the photocopier is on the higher side. And the quality of the product is also on the higher side, which we can make on our PM4, as we have been saying earlier because it will be almost 100% wood-based product. And second, as I said, we have recently introduced fine print paper, which is a high brightness multicolor printing paper. So that product we have introduced in comparison to the product placed by A-grade mills in the market in that segment. So that, too, is successful. We have already got the first repeat orders also, and the response is encouraging. So that, too, we are targeting on PM4 by another 20%, 25%. So that is how we are trying to make out 3, 4 products, [Foreign Language].

Sir, final question. Can you just help me with the understanding of raw material percentage consumption in terms of wood pulp, legacy, and the imported paper if you have? And do you foresee that any change of agricultural commodities will kind of impact you or you remain mostly insulated and -- because this is a percentage which mostly the mills use as a percentage depending on their mill design and configuration? So do you -- can you throw some light here, sir?

Yes. We use more than 50% agro pulp and 35% plus/minus wood pulp on total tonnage and 5% to 10% imported hardwood or softwood pulp. And whenever there is parity in using economy, using imported waste paper, then we use the option of reducing our in-house wood pulping capacity, and we use imported pulp substitutes, good quality wastepaper pulp on. So that is how we normally do. And presently, if you look at the wheat straw prices, they are almost quite stable for the last almost 6 to 8 months. There is not much variation, and though wood prices are going up.

So overall, you see as a blend, your proportion should be stable for you because there are a lot of ups and downs...

We have a lot of flexibility in controlling the cost of raw material.

So overall, as a blend, you think it should remain stable for you, right?

Yes. Because like last year, if we look at the cost of raw material, though prices reduced by 20%, so we could reduce our cost of raw material and chemical consumed also by 20% by doing certain mix and match amongst the different inputs of -- for the pulp. So the overall cost of production decreased by 10%, but cost of raw material and chemicals, we could reduce by almost 18% to 20%. That flexibility we have.

Okay. Sir, and can you just throw some light on the elasticity between the price change of the finished goods and the change of raw materials, both on the -- when it goes higher as well as lower? So the time lag, basically. How is the elasticity like? You see that immediately there is or there is a lot of supply, I mean, given the Indian scenario.

Yes. If you look at my -- if you look at our situation, in particular, as I said, we have orders of 35,000 tonnes plus, which includes, some orders from the open market also. So that execution is for almost 2 months. So any price change that will come that will affect me in the third quarter. So normally, 30 to 45 days orders, most of them they carry minimum 15 days order. And those who are into the government business, their average goes up to almost 45 days. So accordingly, for me, it could affect me after 2 months. And those who are in the open market, the effect to them may come anywhere after 15 to 30 days also, number one. And secondly, the prices of the raw material, if we -- that is being prices of the paper, sale price of the paper, presently, the pressure is more from the imports. And since now, pulp prices have increased by another $200 plus, so that is why from December onwards, the incoming sales price of imported paper should also go up. So that could be one reason giving legroom for industry in India to increase their prices by another 5% to 10%.

Next question is from the line of Samar Lawand from -- he is an individual investor.

Yes. So, sir, you mentioned about the imports. So I just wanted to know how are the Chinese imports have been impacting us? And if you could give a number, like the landed cost of the imports, that would be helpful.

Chinese import is more in the region of coated paper, both chromo and hard-board -- hard paper. And writing, printing, those are coming from China also, but mainly Indonesian -- Asian countries, Indonesia and Brazil, these are the 2 countries which are dumping a lot of paper into the indigenous market. So -- and the disturbing factor is that now they have a lot -- they have a good setup in India. They have -- and they are trying to enter the market by giving the delivered price -- by taking delivered price orders also, so which are almost in the range of -- presently, the orders they have booked in the range of INR 70, INR 71, INR 72 a kg depending upon different GSM and where geographically you are placed. So that was the one factor which brought the prices down from the high level to in this range and -- but since -- as I said earlier, the pulp prices have increased. So next pricing -- deliveries may come with an increase of $50 to $100 per tonne of paper. So that will decide -- that will be one of the factors other than the demand in the season that will decide the increase in prices in the coming months.

Right, sir. And so you mentioned INR 72 per kg, right? So they are almost selling that, let's say, 10% to 20% discount of the prevailing prices at which we are selling right now. So how -- any plans to tackle this?

Pardon, I could not get your question.

So you mentioned that the Indonesian and the Brazilian players are selling at INR 72 per kg, right? Their standard cost?

Yes, yes.

Yes. And the current -- for this quarter, our prices were around INR 90 per kg. Is that correct?

It was INR 90-plus in the first quarter. But in this quarter, second quarter, they are in the range of INR 70 to INR 75 for different players, for different qualities, yes.

For which quarter, you mentioned?

Pardon?

For which quarter, you mentioned it?

Second quarter, yes.

[Operator Instructions] We have our next follow-up question from the line of Mr. Aman from Aman Investments. The line for the current questioner got disconnected. [Operator Instructions]. As there are no further questions, I would now like to hand the conference over to the management for the closing comments.

Thank you. Thank you, everyone, for your wishes and for participation and for taking interest in the company. We wish you all a very, very Happy Diwali. Thank you. Thank you very much.

Thank you. On behalf of Satia Industries Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.